If you’ve been in business for any amount of time, you’ve probably heard something about keeping your receipts. And we’ve heard some good myths about when and when you don’t have to keep them. We’re here to set the record straight and tell you exactly when you need to keep receipts.
First, let me explain that there are different suggested records for different types of transactions. For example, what you keep to prove the purchase of inventory is different than gas for your car. We’re going to explore two categories today: General, and Travel/Entertainment expenses. But there are many more that we’re not discussing today.
What are they?
General expenses are things like paper, utilities, cell phone, etc. Those types of expenses must be be proved with a bank/credit card statement, receipt, or invoice that shows the date, amount, and busienss purpose.
How long should I keep records for?
Generally speaking, you’ll want to keep records for at least 3 years from when you claimed them on your tax return. The good news is that you can keep them in paper form, or electronically. We’re a big fan of using the mobile app for Xero to take a snapshot of the receipt, and recording the transaction right on the spot when it happens. You can also use other systems like Evernote, Google Drive, Dropbox and Box to store your records. If you choose to keep paper, then have a good file system organized by year and type of expense, at the very least.
Travel & Entertainment Expenses
What are they?
Just as it sounds, expenses you incur to travel, take clients out to lunch. It also covers lodging, rental cars, transportation, and a host of other things. See IRS Publication 463 that is referenced below for more things that qualify as travel and entertainment expenses.
How should I keep records and for how long?
The trick here is to have “adequate” records. There are 4 main points that you must prove in order to have a deemed adequate expense in this category:
- Time (for travel)
- Place or Description
- Business Purpose
What that basically means is that you must have a receipt, log book, or some kind of record that proves those 4 main points for each expenses you deduct. Estimates don’t count. The long and short of this is: that you keep all receipts/invoices for each expense in this category. There are only a few exceptions, one of them being that if your expense in under $75 (except lodging), you can simply provide bank statements to prove you expense. Of course there are more exceptions, but we don’t have time to go into them in this post.
And like above, you should keep these records for 3 years after you file the tax return for the year you’re taking the deduction in.
The IRS has some pretty elaborate articles and publications on this topic. We referenced IRS Publication 463. Feel free to check it out if you need to dive in a bit deeper. Or, leave a comment and reach out to us and we can help you navigate the murky waters of business deductions.